The Washington Monthly[3]: On ABC’s "This Week" earlier, George Will explained his belief that FDR financial/regulatory policies discouraged investment and created an environment in which the "depression became the Great Depression." Fortunately, Will was sitting next to Paul Krugman. To hear Will tell it, the Roosevelt administration stood in the way of investors. In a fairly devastating 45 seconds, Krugman not only set the record straight, but explained that it was FDR’s desire to balance the budget and cut federal spending that contributed to a decline in 1937.

I know Krugman has a Nobel Prize and Will doesn’t, but what actually happened to investment in the 1930s? DeLong notes[4] that gross real private domestic investment rose during the 1930s. Econospeak weighs in[5] (HT again to MR, same post) with data on net private investment, claiming it disproves Will’s argument:

Will not only tried to claim that FDR somehow spooked investment demand but he also suggested that net investment was negative during the 1930’s. Krugman’s counter was that investment demand tends to be pro-cyclical so it fell during the 1929 to 1932 period but rose from 1932 to 1937 as real GDP rose. Fortunately we can turn to this source[6] for the NIPA tables. Table 1.1.6, line 6 provides us with gross investment, while table 1.7.6, line 5 provides us with private depreciation. The difference is net investment, which we have graphed from 1929 to 1941. The pro-cyclical nature of net investment that Krugman noted is rather clearly shown. We also see that net investment was positive in 1936, 1937, and 1939.

If some pundit like Will is going to mention an economic time series such as net investment, shouldn’t he be required to get the facts straight? Maybe such pundits should also be required to bring along correctly drawn charts of the series that they mention.

Alas for Krugman, DeLong, and Econospeak, the data actually make Will look good. Here’s Econospeak’s chart:

[7] As DeLong argues, gross investment is positive. As Econospeak argues, net investment is positive for some of the years. So it wasn’t negative for every single year of the 1930s.

But Will is right on what matters. The sum of all investment in the 1930s is NEGATIVE. (You can see that by looking at the graph and noting that the area below the zero line is much greater than the area above it.) That is, the positive years don’t make up for the negative years. Net investment in the 1930s is negative. That is, gross investment between 1930 and 1939 does not make up for depreciation. It’s not even close. Will is right–the investment climate in the 1930s was lousy. Now it may be that the data on depreciation and investment are not very accurate. But these data support Will, not Krugman.

That adds up to a reduction in capital (gross investment minus depreciation) of $225 billion (in real terms in year 2000 dollars. So yes, there were three years that were positive in the 1930s. But the over the whole period, a disaster.

I’m not an expert on NIPA, so if Econospeak has used the wrong data, please let me know.